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Bank payment obligation (BPO) brochure from ICC

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A Banking Commission Supply Chain Finance projectSWIFT and ICC collaborate on enhanced rules and tools for trade financeBankPaymentObligationn A new solution in supply chain finance to shape trade in the 21st Centuryn An alternative means of settlement in international traden Providing the benefits of a letter of credit in an automated and secured environment

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OvervIeW We are aiming at developing a set of rules called “BPO”. The BPO is an irrevocable undertaking given by a bank to another bank that payment will be made on a specified date after successful electronic matching of data according to an industry-wide set of ICC rules. An ICC-SWIFT endeavour SWIFT, the financial messaging provider for more than 10,100 financial institutions and corporations in 210 countries, and the Banking Commission of the International Chamber of Commerce (ICC) have joined forces to develop and adopt an industry-wide standard: The Bank Payment Obligation (BPO). Trade finance is a critical banking service supporting the world economy. It is vital that the industry aligns on enhanced rules and tools in support of trading counterparties whether large or small. The ICC Banking Commission views the development of the BPO rules and the related ISO 20022 messaging standards as strong foundations for banks to provide modern risk and financing services aligned with today’s technology evolution. Kah Chye Tan Global Head of Trade and Working Capital, Barclays, and Chair of the ICC Banking Commission

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The BPO will offer an alternative means of settlement in international trade. The BPO will provide the benefits of a letter of credit in an automated environment, without the drawbacks of manual processing associated with traditional trade finance. It will also enable banks to offer flexible risk mitigation and financing services across the supply chain to their corporate customers. A BPO is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after a specified event has taken place. This ‘specified event’ is evidenced by a ‘match’ report that has been generated by SWIFT’s Trade Services Utility (TSU) or any equivalent transaction matching application.BPOs enable banks to mitigate the risks associated with international trade to the benefit of both buyers and sellers. They enable flexible financing propositions across the supply chain, from pre-shipment to post-shipment. They provide an assurance of payment to the seller similar to that obtained under a confirmed letter of credit. BPO benefits will include:n Mitigating risks in international trade for buyers and sellers aliken Speed, reliability, convenience n Reduced costs and improved accuracy n Enhanced risk management n Assurance of payment n Access to flexible financing (options) n Securing the supply chain

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THe CHALLeNGeS AHeAD New challenges have emerged as a result of the crisis of confidence in credit markets, forcing the implementation of a more restrictive regulatory regime. This has intensified corporate demand not only to apply rigorous measures to the management of risk but also to identify ways of optimising the management of working capital and enhancing process efficiency. The changing landscape The landscape of world trade has changed dramatically during the past decade. Borders and barriers have been broken down through widespread liberalisation in emerging markets. The combined pressures of globalisation and the internet have accelerated consolidation and specialisation, at the same time encouraging a wave of new entrants among service providers. “Industry forecasts indicate that world trade will grow by 73% in the next 15 years, with merchandise trade volumes in 2025 hitting $48.5trillion, compared to today’s $27.2trillion. ICC and SWIFT are best positioned to help the banking industry facilitate further growth of trade using innovative solutions. SWIFT is committed to helping its member banks deliver innovation in trade finance to the corporate world”, indicated Gottfried Leibbrandt, Head of Marketing, SWIFT. As the volume and value of international trade has grown, there has been a significant shift away from the use of traditional trade instruments such as letters of credit, in favour of trading on open account. Driven by advances in new technology, the market has demanded new solutions to help deal with increasing cost pressures and changing risk dynamics.

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GLObAL INTerOPerAbILITy IN SuPPLy CHAIN ServICeS The BPO in detail The BPO delivers equivalent business benefits to those previously obtained through a commercial letter of credit, while eliminating the drawbacks of manual processing associated with traditional trade finance. One of the key features of the BPO is that it supports interoperability between participating banks, because it makes use of a standard set of ISO 20022 messages. This interoperability enables banks to collaborate with one another to extend reach across global markets, in order to provide a comprehensive range of supply chain services to corporate customers. The matching of data using ISO 20022 messages reflects events that have taken place in the physical supply chain, which create trigger points for the provision of financial supply chain services – for example, a proposition for pre-shipment finance based upon a confirmed purchase order, or a proposition of post-shipment finance based upon an approved invoice. The BPO may be used as collateral in each case. The industry has also collaborated with corporate users on the extension of the ISO 20022 messages exchanged between financial service providers, so that those same messages can be adapted for communications between corporates and their banks. These messages will, for example, enable end-to-end straight through processing with corporate ERP systems.

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CreATING A NeW buSINeSS STANDArD: WHy?Additional clarity Adoption by and transparency the industryOpen account often fails to provide banks For decades now the Documentary Credit with access to underlying transaction data has become established as an universal – impeding their ability to follow relevant market practice, thanks largely to the pub-events in the physical supply chain. The lication and maintenance by the ICC of a set BPO and related ISO 20022 messaging of rules, the Uniform Customs & Practice standards provide access to relevant data, (UCP). The universal acceptance of the UCP records and reporting – giving banks the by practitioners in countries with widely ability to provide risk mitigation, finance divergent economic and judicial systems is and payment services while introducing testament to its success. additional automation and efficiency into The BPO goes a step further. Both ICC and the supply chain management process. SWIFT believe that by working together and By matching data via the ISO 20022 mes- leveraging their respective positions across saging standards, banks can track events the trade finance community, they can in the physical supply chain which help ensure that the BPO will have an impor ant t to trigger the availability of value-added role to play in supporting the develop ent mservices in the financial supply chain. Unlike of international trade in the 21st century, the manual checking of documents, there is addressing cost pressures in the face of bPO will combine the best of both worldsno subjectivity attached to data matching – increased automation and changes in the (Documentary Creditit either matches, or it doesn’t. regulatory environment. and Open Account) Contract Contract Contract Documents Documents Buyer Seller Buyer Seller Buyer Seller Documents Application Bank Documents Letter of Open Advice Data Data Credit Payment Account Obligation Documents Data Issuance BPO BPO LC Issuing LC Advising Obligor Recipient Buyer’s Seller’s Bank Bank Bank Bank Bank Bank Payment Payment Payment Bank services based on paper Bank services based on Bank services limited to document processing electronic trade data exchange payment processing Array of risk, financing and processing services to address both cash management and trade finance needs

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WHy PArTICIPATe?Global banks and corporates are alreadyinvesting into the bPO projectBenefits Benefits Benefits for importers for exporters for banks Safer than prepayment. The buyer does not Assurance of payment Low risk business have to pay up front before receiving the documents of title to the goods purchased Facilitates financing for the buyer eg Access to flexible pre-shipment or Prudent use of capitalextended payables post-shipment financeBPO strengthens buyer/seller relationships. The credit risk is transferred from Steady source of commission Secures the supply chain the buyer to the Obligor bank and fee incomeBPO helps to expand business opportunities. Reduces risk of buyer cancelling Opens door to new business May increase competitiveness in foreign or changing the order opportunitiesmarkets.The buyer can confirm that the goods are The buyer cannot refuse to pay Strengthens core relationshipsshipped on or before the due date to the due to a complaint about the goodsrequired specification Foreign exchange risk can be eliminated Automated solution with a BPO issued in the currency of the seller’s countryThe buyer can structure payment The seller can structure the delivery Lower operating costsaccording to the buyer’s interests schedule according to the seller’s interests, determining when payment will be made and shipping the goods accordingly The bank bears responsibility Meets the market requirement for any oversights for banks to collaborate more on risk and client on-boarding.The buyer can negotiate better terms Automated data matching reduces and conditions. By issuing a BPO, the buyer complexity and increases reliabilitydemonstrates the ability to pay and can negotiate improved terms in the futureThe BPO protects the buyer since the bank By removing subjectivity of physical only pays when the seller complies with the document-checking the risk of discrepancy, specific terms and conditions and produces dispute and delay is reduced.the data requiredThe buyer can build safeguards into the BPO, BPO can be introduced at any stage including inspection of the goods and quality of the transaction. control, and set production and delivery times Mismatches can be acceptedBPO increases convenience; reduces cost Automated processing accelerates settlement and financing

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Contact informationThierry Senechal André CastermanInternational Chamber of Commerce (ICC) SWIFTSenior Policy Manager Head of Banking, Trade and Supply Chain ICC Banking Commission Co-Chair, ICC BPO ProjectTelephone +33 1 4953 2898 Telephone +32 2 655 4530Email: thierry.senechal@iccwbo.org Email: andre.casterman@swift.com ICC Banking CommissionThe ICC Banking Commission is a leading global rule-making body for the banking industry, producing universally accepted rules and guidelines for international banking practice, notably letters of credit, demand guarantees and bank-to-bank reimbursement. ICC rules on documentary credits, UCP 600, are the most successful privately drafted rules for trade ever developed and are estimated to be the basis of trade transactions involving more than one trillion dollars a year. The Banking Commission is equally a worldwide forum of trade finance experts whose common aim is to facilitate international trade finance across the world. With over 500 members in 85 countries, many of them emerging, the Banking Commission is one of the largest ICC Commissions. ICC voluntary market-based approaches developed by the Banking Commission have often been praised for leveling the playing field in trade finance practices. 38 Cours Albert 1er, 75008 Paris, France Tel: +33 (0)1 49 53 28 28 Fax: +33 (0)1 49 53 28 59 www.iccwbo.org